Turning costs into profits
Once viewed primarily as a way to differentiate themselves from their competitors, value-added services have turned into a nifty way to boost profits.
Staff -- Purchasing, 11/18/2004 2:00:00 AM
In the increasingly competitive electronics marketplace where much of manufacturing is outsourced to contract manufacturers, many of today's electronics buyers expect distributors to help them manage their inventory through bonded and consigned inventory programs, in-plant stores and automatic replenishment services.
And, when a distributor can also offer inventory management, program integrated circuits, label and kit parts or assembly wire and connectors into harnesses, it further increases their odds of being selected as a business partner.
There is also a growing demand by electronics customers to have distributors provide technical assistance with a new part being considered for a new design.
"The number one service [request] is design," says Bill Mitchell, CEO of electronics distributor, Arrow Electronics, Melville, N.Y. "The customer may ask us 'how do I test the part? How do I lay out a circuit board? How do I integrate it into a system.'"
Additional costs for distributors? Yes. But since they can charge a higher price for a component when they provide a value-added service, they've smartly turned it into a profit opportunity and a way to enhance their role in the supply chain.
"Value-added services are a huge profit center for distributors," says Robin Gray, executive vice president of the National Electronic Distributors Association (NEDA). "Services offer [an] opportunity for distributors to differentiate themselves, increase their profit margin" and grow revenues.
A case in point: The dollar amount of value-added business for Phoenix-based Avnet, the leading North American electronics distributor, grew by 15% last year, about two percentage points higher than its overall business.
Such value-added services also help distributors build relationships with both OEMs and EMS (electronics manufacturing services) and often lead to the customer buying more parts from a distributor.
"What we are selling them in the value-added space typically is something that goes off the printed circuit board as opposed to something that is on the board," explains Pat Wastal, senior vice president and director of the interconnect passives and electromechanical business unit at Avnet. "And that has allowed us to engage with the customer and capture some of their board business. A lot of times [after] we have started doing business with a customer through a cable assembly or power supply modification, we ended up supplying components as well."
The net result? "We are being recognized more and more as a value-added distributor," says Wastal. "I don't think our customers knew our capabilities as much" before this. (Among other things, Avnet assembles military connectors and modifies motors by putting on different shafts and adjusting speeds. It also has a power supply value add group and a cable assembly group for discrete and flat ribbon cable. It also takes fan modules, assembles them to customer specifications and adds a terminal or a connector on the end of the wire so that customers can install the fan when they receive it.)
But the outsourcing of such tasks isn't just financially lucrative for distributors. It's also a cost savings to OEM and EMS manufacturers because distributors can perform such tasks at a cost-savings of anywhere between 3% and 5% and because it also allows OEMs and EMS to save floor space. "A customer may want to put down another pick-and-place machine and outsource cable assemblies," suggests Wastal.
Size isn't really a factor in determining whether someone can benefit or should consider buying or offering value-added services. In fact, there is probably an even greater need among small and medium manufacturers for value-added services "because they can't afford to invest in IT systems, the data management systems or the people such as design engineers," says Mitchell. "Ours is an aggregation model so we can afford to invest in [IT systems] because we can implement those solutions across many hundreds and thousands of customers."
And offering value-added services can help a smaller distributor that wants to grow revenue. A case in point: In recent years, Digi-Key—a company often used by engineers who place small orders for parts used in building prototypes—has expanded its business model to include supplying components for volume production.
In addition, it offers IC programming, bonded inventory, cable and harness assembly, customer cabling, bar coding, labeling and battery pack assembly
"It is essential to have value-added services as we grow our volume business," says Steve Tsukichi, vice president of marketing at catalogue distributor based in Thief River Falls, Minn. "Customers are demanding. They want more from distributors. They want us to be more creative on how we service their needs and that all plays into the value-added services arena."
Top 25 Value Added Distributors
2003 North American rankings
| Rank 2003 | Company | VA sales ($ millions) | % of sales derived from VA service | 2003 calendar year ($ millions) |
| Note: Ranking is based on survey. Not all distributors responded. SOURCE: PURCHASING |
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| 1 | Arrow Electronics | $3,561.8 | 72% | $4,947.0 |
| 2 | Bell Microproducts | 652.5 | 52% | 1,254.9 |
| 3 | TTI, Inc. (3) | 220.0 | 40% | 550.0 |
| 4 | All American Semiconductor | 189.0 | 60% | 315.0 |
| 5 | Richardson Electronics, Ltd. | 153.5 | 60% | 255.9 |
| 6 | Nu Horizons Electronics | 135.0 | 50% | 270.0 |
| 7 | Jaco Electronics | 126.9 | 50% | 253.8 |
| 8 | Newark InOne (4) | 116.3 | 25% | 465.0 |
| 9 | DAC | 109.8 | 40% | 274.4 |
| 10 | PEI-Genesis | 40.3 | 68% | 59.3 |
| 11 | Digi-Key. | 38.3 | 10% | 383.1 |
| 12 | NRC Electronics | 29.6 | 90% | 32.9 |
| 13 | Electro Sonic | 27.6 | 40% | 69.0 |
| 14 | Hammond Electronics | 25.6 | 60% | 42.6 |
| 15 | IMS | 21.5 | 57% | 37.7 |
| 16 | Chip-Tech, Ltd. | 13.1 | 50% | 26.2 |
| 17 | Airtechnics | 12.6 | 15-20% | 63.0 |
| 18 | Hughes Peters | 10.7 | 50% | 21.3 |
| 19 | Astrex | 8.9 | 70% | 12.7 |
| 20 | ESCO LLC | 7.9 | 14% | 56.3 |
| 21 | Air Electro | 7.8 | 60% | 13.0 |
| 22 | Surface Mount Distribution | 7.7 | 64% | 12.0 |
| 23 | Master Distributors | 6.9 | 9% | 76.9 |
| 24 | Peerless Electronics | 6.6 | 17% | 39.0 |
| 25 | NEDCO Electronics | 6.4 | 20% | 32.1 |
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